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Good Morning, this is Capital Essence’s Market Outlook (the technical analysis of financial markets) for Tuesday October 31, 2017.

Stocks closed lower Monday after a report surfaced saying the House is considering a plan that would gradually lower the U.S. corporate tax rate.  For the day, the Dow Jones industrial average fell 0.36 percent to finish at 23,348.74.  The S&P closed 0.3 percent lower at 2,572.83. The Nasdaq composite finished just below breakeven at 6,698.96 after hitting an intraday record earlier in the session.  The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, surged 7.14% to close at 10.50.

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One of the more noteworthy developments in recent days has been the move in energy stocks.  The Energy Select Sector SPDR ETF (XLE) has handily outperformed the broader market, rose 0.52 percent on Monday to close at 67.69.  The ETF however, lagged the S&P in 2017, down more than 10 percent.  The S&P is up more than 15 percent in YTD.  Now the question is whether recent rally has more legs? Below is an update look at a trade in XLE.

The graphics below are from our “U.S. Market Trading Map”, show the near-term technical bias and trading ranges.  As shown, the underlying is in a short-term bullish trend when the price bars are painted in green.  The underlying is in a short-term bearish trend when the price bars are painted in red.  The yellow bars identify period of neutral or sideways trading pattern.  Additionally, the light-blue shading represents the short-term trading range.  A move above or below that range is considered overbought (as represents by the red shading) or oversold (as represents by the dark-green shading).  Readings above or below the red and green shaded areas are considered extremely overbought or extremely oversold.

Chart 1.1 – Energy Select Sector SPDR ETF (daily)

Our “U.S. Market Trading Map” painted XLE bar in green (buy).  Over the past few weeks, XLE has been trending lower in a short-term corrective mode as it worked off overbought conditions.  The late September correction tested support at the 50-day moving average.  That level was significant when the ETF climbed above it in early September.  Monday’s upside follow-through confirmed Friday’s bullish engulfing bar and setting the stage for a test of September-October highs, just below 69.  A close above that level has measured move to 70-72, based on the 50%-61.8% Fibonacci retracements of the 2016-2017 down leg.

XLE has support near 66.  Short-term traders could use that level as the logical level to measure risk against.

Chart 1.2   – S&P 500 index (daily)

Short-term technical outlook shifted to bearish (strong sell).  Last changed October 30, 2017 from neutral – see area ‘A’ in the chart.

[Note: for more details analysis, please take a look at our “US Market ETF Trading Map”]

S&P retreated after recent rally attempt ran out of steam near the prior highs, around 2580.  Last week’s high made a series bearish divergences as price made a higher high while Money Flow measure and RSI lower lows.  These are negative developments, increasing the likelihood of downside follow-through in the days ahead.

Short-term trading range: 2555 to 2600.  S&P has support near 2555.  A close below that level has measured move to the trend channel moving average, just above 2500.  The lower boundary of the red band, near 2600, represents key resistance.  Technically speaking, a trade above that level is unsustainable.  Traders should put it on the trading radar.

Long-term trading range: 2500 to 2600.  Unless there is a headline that everyone recognizes as extremely positive or negative, expect S&P to swing within this 100 points range.

In summary, short-term momentums are deteriorating as S&P struggled to get pass 2600.  The index could signal a downward trajectory, depending on how it closes over the next few days.  Initial support is defined by the lower boundary of the pink band, around 2555.  If it closes below that level, the next leg is likely lower, and we’re looking at the low 2500s, based on the trend channel moving average.

 

Thanks and happy trading.

 

(By:Michelle Mai for Capital Essence)

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